Regulators in Europe have become divided over how far proposed shadow-banking regulations should be applied to the domestic asset management industry.
Days after Europe's bank regulator proposed limiting institutions' involvement in shadow banking, a fellow watchdog has publicly opposed the measures.
It comes amid debate over a proposed Europe-wide capital markets union, which investors have criticised because it lacks provision for a harmonised tax framework to be introduced alongside it.
Last Friday the European Banking Authority (EBA), the London-based regulator for Europe’s banks, launched a public consultation on proposed rules setting limits on EU institutions' exposures to so-called “shadow banking entities”. Their proposed definition includes all money market funds – regardless of whether they are registered as Ucits – and all alternative investment funds (AIFs).
But speaking on Tuesday this week at a conference hosted by the Association of the Luxembourg Fund Industry (Alfi), Steven Maijoor, chairman of the European Securities and Markets Authority (Esma), said he disputed this categorisation.
“I disagree with the [broad scope] position taken by the EBA,” Maijoor said, adding that conventional money market funds should be considered in a different light than, say, highly leveraged hedge funds. Ucits regulations already provide a regulatory framework for money market funds, with hedge and private equity funds covered by the Alternative Investment Fund Managers Directive (AIFMD).
Maijoor also laid out Esma’s priorities over a proposed capital markets union, the blueprint of which was laid out in February by Lord Hill, the EU commissioner for capital markets.
Firstly, Maijoor said, the union should facilitate the participation of retail investors. This would “broaden the participation base of European capital markets” and shift the savings culture on the part of European citizens from a focus on deposits to a focus on investment via regulated funds. The second priority was clear and effective implementation; the establishment of a single rulebook comprised progress here but there was “still a lot of work to be done” by Europe’s 28 national supervisors, he said.
Investors have voiced concern that the benefits of a capital markets union may be compromised by the failure to deliver a harmonised tax framework alongside the new rules.
“Ucits 4 was a great piece of regulation with no tax plan to follow it up,” said Roger Exwood, head of product tax for EMEA at BlackRock Investment Management. The problem, he said, was that harmonised tax rules meant that member states had to give up national sovereignty, which they weren’t prepared to do. He asked: “Is there enough political will this time so that eggs can be broken in order to make the omelette?”
Maijoor noted that agreement over tax was not the only sticking point. “We need agreement over insolvency law and company law as well,” he noted. There was considerable variation between member states in both areas, which he said would have to be addressed. Progress on insolvency law would be especially important, he said: “If we want to progress towards creating an SME market that is something like what you see in the US, investors need to know what to do if things go wrong.”